How Much of Your Net Worth Should be Sitting in Cash or Low-Interest Savings Accounts?

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The following is a post by MPFJ staff writer, SK. SK writes about the reasons we get into debt, changing the patterns that get us into debt, and examines small business ownership and real estate investing at her blog, American Debt Project. Please welcome her to the MPFJ family! 

How Much of Your Net Worth Should be Sitting in Cash or Low-Interest Savings Accounts?

Even though your net worth is a pretty simple equation (Assets minus liabilities = net worth), exactly what is the breakdown of those assets? And, is there a magic ratio you need to follow? Like everything else in personal finance, the answer really depends on your situation. To hear rappers tell it, your assets should be spread out as follows:

Assume: $1 million net worth

  • $250,000 in diamonds and platinum from Jacob the Jeweler
  • $100,000 in equity in overpriced Los Angeles/Atlanta/New York McMansion
  • $400,000 in Lamborghinis, Maseratis and vehicles for entourage
  • $50,000 in investments in other rappers and own record label
  • $200,000 cash on hand because it ain’t flauntin’ if you got it

Another extreme example of poor asset selection could be a Dave Ramsey devotee:

Assume: $100,000 net worth

  • $60,000 equity in house that is almost paid in full due to Dave Ramsey’s advice
  • $5,000 in Roth IRA invested in mutual funds as recommended by Dave Ramsey’s endorsed local providers
  • $40,000 earning 0.65% interest in an online savings account for an emergency fund which covers 12 months of living expenses

Call me crazy, but even though the rapper has made some pretty ridiculous investments that make up his total net worth, he still gets points ahead of the Dave Ramsey guy for only having 20% of his net worth in cash versus 40%. It sounds appealing to have 3 (or 6 or 12) months’ worth of living expenses in reserve, but that money should be working for you. Sitting in cash or a less than 1% interest-earning bank account means your money is not even keeping pace with inflation. Consider adding to your cash savings slowly as you invest in other options first. Cover a month of living expenses and then contribute to retirement accounts like a SARSEP or 401(k) to reduce your tax liability. Or pay down any debt that you have, especially anything with more than a 6% interest rate.

At the moment, I’m focused on just paying off my high-interest debt. I save money with every paycheck or side job, and then use large chunks of that to pay down debt. When I am out of debt, I don’t plan to hold more than 10% of my net worth in cash/easily accessible savings. As my net worth increases, that percentage will go down, since I don’t have an extremely risky career (like a rapper) and haven’t built a criminal empire that might require me to flee at any minute and be able to secure hoards of cash in a moment’s notice (like Chapo Guzman). So, if you’ve been diligent about saving and find yourself holding onto a lot of your net worth in the form of cold, hard cash, start considering investments that can give you a better return on a good portion of that cash.

How about you all? What percentage of your net worth do you feel should be held in very liquid accounts (savings, money market, etc)? 

Share your experiences by commenting below!

About the Author Jacob A Irwin

Hi folks! My name is Jacob. I am the owner and operator of My Personal Finance Journey. I started this blog in January of 2010 and have enjoyed the journey ever since. Since finishing up graduate school in Virginia in 2014, I have been working in biopharmaceutical development in Colorado. You can read more about me and this site here​. Please contact me if you have any questions!

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Leave a Comment:

Sustainable Living says September 21, 2012

I think that this is a great metric – right now, I'm finishing up paying off debt, and have about 5-7% of my total net worth in liquid cash accounts. I'm OK with that for now, because we are re-doing the house and the savings doesnt stay in there very long (unfortunately)
My recent post Lending Club 6 Month Update

    AmericanDebtProject says September 23, 2012

    So you want to have more in cash? I think as long as you are forecasting upcoming needs (like if you have a big remodeling project planned) and move money into cash, you don't need much more than that sitting in an emergency fund!

Financial Samurai says September 22, 2012

Ha! I'm assuming the rapper allocation is fake yeah?

$100,000 in equity and $400,000 in Lambos is messed up.

But, I'd rather have a $1 mil net worth than $100,000!

    AmericanDebtProject says September 23, 2012

    Haha, true, $1 million is better than $100K. The rapper allocation is fake, but I think I'm pretty close for any rapper of the Wiz Khalifa/Drake/Rick Ross variety! Imagine 40% of your net worth is in cars. I think I would stop driving!
    My recent post You Don’t HAVE to Do Anything!

AZJoe says September 22, 2012

It makes sense to me to have an emergency fund! However, your emergency fund is money you will rarely, if ever, use. Why not put most of it in laddered CD's? It's easily accessible, makes some interest (not much I know but some) and there is a dis-incentive on inappropriately using it – the withdrawal penalty. Once it has been in the CD 90 days (in my credit union with a 3 month interest penalty) the worst that will happen is I'll lose my interest, not my principle. When fully funded and properly laddered, you will have a CD maturing monthly. Pay emergency costs with a credit card and use that month's maturing CD to pay of f the credit card.

    AmericanDebtProject says September 23, 2012

    That's a cool idea, and I had not heard of laddered CD's. I will have to check my bank to see what the minimum is for these CDs. But, you still probably will not have too many situations where you need access to ALL of your cash immediately. So if you have other funds and multiple sources of income, you should be able to get through most situations.
    My recent post You Don’t HAVE to Do Anything!

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